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Government opens applications for Future Fund

22 May 2020

Please note: the information contained in this legal update is correct as of the original date of publication

On 18 May 2020, the Government announced further details of the Future Fund scheme, being the scheme aimed at supporting earlier stage businesses during the Covid-19 crisis. This follows the initial unveiling of the Future Fund on 20 April 2020.

In broad terms, the Future Fund is a £250 million government fund which will provide convertible loans to UK-based companies (“investee companies”) ranging from £125,000 to £5 million, subject to at least equal match funding from private investors (“matched investors”). The scheme will be delivered in partnership with the British Business Bank.

Applications can be made for funding from the Future Fund from 20 May 2020 until the end of September 2020.

Learn more about the Future Fund by using our Q&A guide below:

  • Check eligibility criteria: Strict eligibility criteria apply concerning the investee company, the matched investors and the use of the funds. These are summarised below and should be carefully reviewed.
  • Cost/benefit analysis: The terms of the funding are relatively complex and detailed; they are also non-negotiable. The key terms are summarised below but the structure of the convertible loans will not be appealing to or suitable for all companies. Assuming the eligibility criteria are met, investee companies should conduct a detailed review of the terms of the funding and be comfortable that this is an appropriate form of finance to apply for, weighing up the company’s needs, growth plans and the current market conditions. 
  • Act swiftly: Given the limited amount of funds currently available through the scheme a wave of applications has already been made, with funds being allocated by the Future Fund on a “first come first served” basis.
  • Engage with investors: As the application process is designed to be led by a “lead” matched investor, investee companies considering applying for funding from the Future Fund should identify their lead investor and obtain their support. 
  • Identify consents and approvals required: Investee companies are very likely to require a range of approvals and consents to issue the convertible loans to investors and to ultimately issue the shares, should the loans convert. It is essential to review existing shareholder agreements and articles of association, so that these consents can be identified and to consider whether those approvals will be forthcoming. 
  • Appoint solicitors: A requirement of the scheme is for the investee company to appoint solicitors to handle the flow of monies from the Future Fund and the matched investors to the investee company as part of the completion process. Solicitors will need to perform identity checks on all parties from whom monies are received and that process can take some time and so is best started as soon as possible. Solicitors can also provide advice and assistance on the funding documentation itself and assist with some of the preparatory steps referred to above. 

There are various criteria that must be satisfied by the investee company seeking the funding, as well as by the matched investor(s). Restrictions also apply to the ways in which the investee company can use the funding. 

Criteria to be satisfied by the investee company
The investee company must satisfy all of the following criteria:

  • The investee company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive);
  • If the investee company is a member of a corporate group, it must be the ultimate parent company;
  • The investee company does not have any of its shares or other securities listed on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue;
  • The investee company must be a UK incorporated limited company;
  • The investee company must have been incorporated on or before 31 December 2019; and
  • At least one of the following must be true for the investee company:
  • Half or more employees are UK based
  • Half or more revenues are from UK sales

Criteria to be satisfied by the matched investor(s) 
The matched investor(s)  must fall within any of the following categories:

  • An “investment professional” within the meaning given to that term in article 19 of the FPO*;
  • A high net worth company, unincorporated associated or high value trust falling within article 49(2) of the FPO;
  • A “certified sophisticated investor” or a “self-certified sophisticated investor” within the meaning given in articles 50 and 50A respectively of the FPO;
  • A “certified high net worth individual” within the meaning of article 48 of the FPO;
  • An equivalent professional, high-net worth, institutional or sophisticated investor in accordance with applicable law and regulation in such investor’s home jurisdiction; or
  • An association of high net-worth or sophisticated investors within the meaning of article 51 of the FPO.
  • Capable of being classified as a “professional client” within the meaning given in the glossary to the FCA Rules**.

Criteria to apply to the use of the funding
The proceeds of the convertible loan agreement must not be used by the investee company to:

  • Repay any borrowings from a shareholder or a shareholder related party (other than the repayment of any borrowings pursuant to any bank or venture debt facilities);
  • Pay any dividends or other distributions;
  • For a period of twelve months from the date of the relevant convertible loan agreement, make any bonus or other discretionary payment to any employee, consultant or director of the investee company other than as contracted prior to the date of the relevant convertible loan and as paid by the investee company in the ordinary course of business; or
  • Pay any advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider on monies advanced by the Future Fund.
  • The application process is investor-led. This means that a matched investor (or lead investor of a group of matched investors) (“lead investor”), must create an online account and apply in connection with an eligible investee company. The lead investor must certify that they meet the scheme eligibility criteria and provide key investment details. 
  • The investee company will need to confirm the accuracy of the investment application details provided via a director’s certificate, before submitting the full application.
    Investee companies are still able to register their interest in the scheme following checking their eligibility.
  • There are sets of FAQs published on the British Business Bank website:
The form of the applicable convertible loan agreement which will govern the provision of the funding has been published and is accessible here. The key terms are as follows:
  • Matched investors and the Future Fund must both invest using the provided form of convertible loan agreement. There is no flexibility on this. 
  • As a convertible loan, Enterprise Investment Scheme (EIS) tax relief will not be available to the matched investors on their investment using the Future Fund scheme. The matched investors should consider the potential impact of the convertible loans on EIS or Seed EIS investments they may have previously made and on those they may wish to take in the future. While the investor FAQs address these issues to some extent, specialist tax advice should be sought. 
  • The convertible loans are unsecured.
  • The convertible loans will have a minimum of 8% per annum (non-compounding) interest charge applied.
  • Unlike a typical bank loan, the interest is not payable on a monthly basis but will instead accrue until the loan converts. At this point, the interest will either be repaid in cash or convert into shares.
  • Subject to some specific provisions in the convertible loan agreement, conversion of the loans into shares in the investee company could occur in certain circumstances:
    • a “Qualified Funding Round” – being a future investment round in which at least an amount equal to the amount of the convertible loans under the Future Fund scheme is raised;
    • on a “Non-Qualified Funding Round” – being a future investment round in which less than an amount equal to the amount of the convertible loans under the Future Fund scheme is raised;
    • on an “Exit” – i.e. a sale or IPO;
    • and on maturity after 36 months.
  • On conversion the matched investors and the Future Fund will obtain the highest- ranking class of shares and will benefit from a discount of at least 20% to the share price valuation of the conversion trigger event. This favours the investors who in effect receive more shares for their money. The discount will only apply to the principal loan amounts converting and not to any interest.
  • The loans cannot be repaid early by the investee company other than with the agreement of all of the investors.
  • The loans are repayable in the following circumstances:
    • on the maturity date (if the lenders elect for repayment rather than conversion);
    • on an Exit (if repayment would be better for the investors than selling shares if the loans were to convert), together with the Redemption Premium; and
    • on an Event of Default (together with interest and the Redemption Premium)
  • The Redemption Premium is an amount in cash equal to 100% of the convertible loans issued to each investor.
  • The investors benefit from various generous protections, including:
    • “most favoured nation” protection; 
    • rights to upgrade their shares to a more senior class of share that may be issued on subsequent funding rounds;
    • rights to freely transfer the convertible loans to other investors; and
    • “anti-embarrassment” type protections, e.g. if an exit event follows conversion of the convertible loans.
  • Investors will benefit from on-going financial and other information rights and covenants from the investee company (e.g. negative pledges).
  • The introduction of the Future Fund should be viewed as a welcome development for high-growth companies, providing them with a potential source of critical funding for them to continue their operations during these very turbulent times. 
  • However, the terms applicable to the funding require careful and proper consideration, particularly the conversion discount and the 100% redemption premium that could apply if the loans become repayable. 
  • That said, companies wishing to access the Future Fund as a source of finance will need to move quickly (given the volume of applications and the limited funds that are currently available). 

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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